Sunil Jain: Ladies and gentlemen, our topic for discussion this evening is “Have banks been soft on promoters?” When we see Vijay Mallya with his yachts, cars, horses and planes, one gets the impression that banks have been too soft on promoters. But, how genuine is that perception? Why is it that PSU banks have higher npas than private sector banks? We have a great panel to debate these issues and if I may begin with you, Ms Bhattacharya, are NPAs of PSU banks higher than those for private sector banks, because you are soft on promoters?
Arundhati Bhattacharya: Before I start, I must tell you that I am very fortunate to be on this panel because Mr Vinod Rai has been on the board of the State Bank of India.
We must remember that the new generation private sector banks have come in without any legacy. Also, if I consider the agri segment, SBI is the lead bank in 161 districts and the most backward ones because the credit absorption capacity is very low resulting in more NPAs. So, we need to have extension services, which maybe in the past we were not equipped to do earlier but we are now. In the large corporate segment, we may have stressed accounts but we don’t have NPAs to the extent that you may be expecting. And this is true for both the public and private sector banks.
But we lent to the mid-corporate segment, which over time has become bigger. When India grew in the 2007-08, these companies also grew but the economy didn’t take off—while the projection was 8.5% we landed at 4.5%. So the mid-corporates, which have a single line of activity, didn’t have the kind of staying power that large corporates do.
However, the difference between PSUs and private banks is that PSUs, are subject to many checks and balances. For instance, the private
sector is allowed to do bilateral deals, nobody questions them if they simply take a hair-cut and get the assets off their book. But we are subject to the RTI, CVC, CBI and as a result we try to follow a process so that there is no questioning of why we did something and whether a market price was actually determined. As a result what happens is we have to set a reserve price and go for an auction; if that doesn’t work we have to set a second price and hold a second auction. Only after that can we go for a bilateral deal.
SJ: So how long does this process take?
AB: It takes a long time. I have even suggested that we put both reserve prices at the same time. I was told that is not to be done. Then what will happen? The second reserve price might get leaked out, so your first auction will always fail. So you can never do it.
SJ: This is the perfect time to bring in Mr. Vinod Rai. If you forget that you were part of the bank’s board for a moment, is it correct that banks are being soft on promoters? Also, is it is possible to streamline the processes for public sector banks to be able to sell stressed assets, say take Vijay Mallya’s Kingfisher and give it to Vistara for example, 60 cents on the dollar?
Vinod Rai: My knowledge of the financial sector is of course eight years old. The only good thing that’s happened is the CAG does not audit public sector banks. So at the least, I can be held responsible for ruining the rest of the economy and whatever happened to the public sector banks is of their own creation. I have been a great votary and a great supporter of the public sector banks. And I am in agreement in some ways with what Arundhati Bhattacharya has just said. There is only one thing which needs to be taken into consideration that perception is something that pervades statistics. Perception is something which transcends far beyond what we discuss in board rooms and what we put out to statisticians or analysts.
We must say that roughly up to 2006 or 2007, banks and public sector banks indeed did provide tremendous amount of support to the economy to grow at that rapid rate. It was only when the external environment turned slightly adverse that the pressures started operating, not because of the effect of the meltdown—because we weren’t plugged into the toxic assets. But it was then that some of our weaknesses started coming forth. And it has nothing so much to do with the mid-sector or the large sector. I think it is a case of the quality of the appraisal that we did.
Sunil Jain: The quality of the appraisal is not good?
Vinod Rai: Largely for infrastructure and the large projects where the corporates come into the picture. And unfortunately what has started happening today is, and I think Rajiv Lall has also argued somewhere, that the hit is being taken by the lending institution and not by the equity provider.
Sunil Jain: Rajiv, you have lent to power projects that never got coal and to road projects which never got their land. One way to look at it is
that this is crony capitalism and you were part of it. The other way to look at it is you were lax and you said the government of India wants roads to be built, we presume they will get the land, so the hell with due diligence, they will give the coal.
Rajiv Lall: Before I answer the question, I also have to make a disclosure that Mr Vinod Rai has many footprints on this, he was also on the board of IDFC. So, he has been privy to the quality, good or bad, of appraisals on both sides. He has seen private entities such as IDFC, he has seen public sector entities such as SBI. So let me say that the reality is much more complex than you are trying to make it. I think that the quality of appraisals is perhaps only just one of them and it is not uniformly applicable. So, there are clearly public sector banks and private sector banks that have very deep expertise in appraising project finance and doing infrastructure. But then there are many other public sector banks that do not have that expertise. And to some extent the whole consortium lending kind of culture in Indian Banking was designed for the less capacitated public sector banks to ride off the capacity and expertise of more experienced colleagues. So, you have the concept of a lead bank. The presumption is, not unreasonably, the lead bank has actually done the job. That hasn’t applied uniformly. So yes there have been some infirmities in the ability of banks to assess risk.
I think a lot of bankers will also have to agree and admit when the tide is rising and competition is fierce, we tend to make certain decisions which we otherwise wouldn’t. This is normal in any macro-cycle. We tend to make certain decisions which we otherwise would not. So, if competition is driving pricing to crazy levels you have to make a decision. Do you fight for little bit of market share, or you insist that your pricing is going to be completely reflective of the risk that you know is embedded in there. So there is a herd mentality that starts operating. However, when you specifically take the case of infrastructure, I think that there is a lot to do in the policy environment that didn’t pan out that is responsible for the asset quality.
AB: If I can also just add to the answer, it is not only a question of appraisal but also a question of the models that the banks follow. Nowhere in the world do you fund 30-year assets with 10-year money. Not only do you take 10-year money if you ask for a bullet repayment at the end to be refinanced, that was not accepted, not even by the regulator. So necessarily the banks had to create structures whereby 30-year assets were getting paid in 10 years. Now that is asking for trouble.
SJ: But are there not cases where you know the promoter is diverting funds, we know that the projects have been gold plated. Do you admit that is the problem or not?
RL: So I go back to the issue of what happens when the tide is rising in times of macro run ups, leverage tends to go up and there is the tendency of bankers to be satisfied by capital structures that we could tell were less than robust. But how we resolve this? We have talked about the role of the government and we have talked about the responsibility of the bankers but there is also the role of regulations.
So my experience with banking regulations, as I’m discovering it, is that they tend to be extremely prescriptive and in any resolution kind of situation you need some amount of flexibility. The presumption of the regulator, for whatever reason, is that bankers are unable to make judgments and therefore, they have to prescribe very narrowly that you can do this and you cannot do that. Just to give you an example, I’m told that the Banking Regulation Act disallows security of more than 30% of equity of the borrowing company. Now you tell me if the fellow has over-borrowed and he has over-leveraged, that debt has to be converted to be equity. As a banker when I’m trying to resolve that, I’m prevented by the regulations.
SJ: Mr Singhvi, we’ve heard what people on this side have said and Mr Vinod Rai has been very diplomatic for some reason. Do you believe that this is true that it’s just a part of the cycle that people give loans just out of exuberance and later on cannot help it. How do you explain a Vijay Mallya situation? Does it smell to you of banks being soft on promoters or is it the point that Mrs Bhattacharya is making that the rules are against them.
Anil Singhvi: I have heard both the chairman of SBI and Rajiv; the point is very simple that both are terribly wrong. If they are suggesting that all promoters are snow white and they have not done any wrong then why do we have such large NPAs.
Andhra Bank and PNB have gross npas and restructured loans of 16% of their entire balance sheet as on December 2014 and if I take only the loans it works out to be 23%. So if one quarter of your lending is either a gross npa or a restructured loan, are you are going to blame the government, the regulators and the policies but not the banks? And taking the point from where Mr Vinod Rai left off that until 2007-08 we had a going which was good. It was good because banks lent money recklessly.
I can tell after being in the cement industry for 25 years, you are really penalising an efficient producer by hand holding the rogue guy. I myself have suffered enough because of those promoters who have either not paid back or every time wanted the loan to be restructured. I paid 14%, they were allowed to pay only 3% and every time their loan was restructured for seven years.
RJ: I concede that in times of rising tides, there is some laxity in standards. But, that is not the only explanation, there is much more to it. You cannot point a finger to poor appraisal as there is something bigger that is happening, the issue of low coal for power projects that are not completed, that’s a big part of the issue. So, there was a covenant on behalf of the government that certain action would be taken; there were certain expectations by the bankers that these policy actions will be taken. The reality is that there were not. Now you can get into the technical legalities that you should have done your appraisal, did the actual agreement say that the government was legally committed to provide the coal and you would probably find some answer there. But the expectation that the government is representing to you that coal is going to be available when the project comes live you tend to take that seriously, especially if you are a public sector banker as you are owned by the government.
AB: The fact of the matter also is that we are country where there is a rule of law. A wilful defaulter can go to a court and the court is at liberty to give whatever judgement they want. So therefore at every step, if it’s a large promoter, he will challenge every one of your actions in court. And it is not only one court; he can keep going from one court to the appellate bench to the next court till they reach the Supreme Court. And that happens. Our ecosystem has still not matured enough for quick resolution of assets and I don’t think we should blame ourselves for it.
Sunil Jain:Thank you very much, that was a very enlightening debate, but I think the most important part I take from it is the assurance from Arundhati Bhattacharya, who is fighting this with a passion nobody else has shown, that between the RBI and the government there seems to be a lot of appetite for change so there is really no reason to be pessimistic. I think it is a very good note on which to end the discussion and I would like to thank all of you.